Articles

Tackling a tough macro-economic environment

Hans Goetti of Finaport shares his views and outlook for the global economy, and explains the main dangers and implications for investors.

Date: Sept 2011

Tags: Recession, Fiscal policy, Emerging markets, Asset allocation, Liquidity, Portfolio construction

  • Today’s recessionary environment resembles that of the 1930s, with excessive levels of debt, which are not sustainable in the long run, and deleveraging
  • Investors, and more importantly policymakers, need to understand that the traditional monetary and fiscal measures don’t seem to work
  • The current debt levels present the greatest danger in the markets, combined with how policymakers are dealing with them
  • More frequent client contact in Asia during periods of market turbulence can be a positive thing for the relationship, as advisers can explain to them what action is being taken and why

According to Hans Goetti in an interview, the risk of recession has greatly increased over the last few months.

For example, the PMI readings in major areas such as the US, the Eurozone, and even China, have come down quite a lot, with some already in recessionary territory. There are also other indicators such as stubbornly-high unemployment levels, said Goetti.

It also remains to be seen just how much downside risk the equity markets have, he said, adding that he thinks there is some downside left, with the ultimate bottom potentially still 10% to 15% away.

A worrying picture

When looking at the type of recessionary environment the market is in, Goetti said it resembles that of the 1930s, with excessive levels of debt, which are not sustainable in the long run, and deleveraging.

In such an environment, there tend to be regular economic downturns – probably every two to three years, he explained.

Investors, and more importantly policymakers, need to understand this because the traditional monetary and fiscal measures don’t seem to work, he said.

Market dangers

According to Goetti, the current debt levels present the greatest danger in the markets, combined with how policymakers are dealing with them.

The problem, he said, is that everything has now been tried – and every time there is quantitative easing, there seem to be diminishing returns. For example, he explained, QE1 led to a stock market rally of close to 100%, QE2 created a rally of about 16%, and QE3 might bring even less.

At the same time, he added, the scope for fiscal policy to provide a solution to the global economy is getting less and less. And as the market starts to realise that policymakers are running out of bullets, they act accordingly.

Emerging markets as the answer

Goetti said a problem with emerging markets is that they are tied to the global economy. While some of them, like China or India, for example, have huge domestic markets, emerging markets in general will start to realise they cannot export their way to growth because of the deterioration in the external environment.

If some emerging markets focus more on the domestic economy, however, this will probably boost Asian currencies.

Changing approaches to asset allocation

When it comes to core-satellite portfolios, Goetti said European clients are more willing to give wealth managers a discretionary mandate, whereas in Asia, clients tend to be more hands-on and prefer to award advisory mandates.

Yet this more frequent client contact during periods of market turbulence can be a positive thing for the relationship, he said, as advisers can explain to them what action is being taken and why.

 

 
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